Selling Hotel and Apartment: Defer Taxes with a 1031 Exchange
When selling a hotel or apartment, capital gains and recaptured depreciation taxes can be effectively deferred by initiating an Internal Revenue Code Section 1031 tax deferred exchange. Personal property including furniture, drapes, laundry, and restaurant equipment is also eligible for a tax deferral given like-kind or like-class personal property is replaced within 180 calendar days of the hotel or apartment closing. Debt and net equity in the replacement property must be equal or greater than the relinquished or old property to defer 100 percent of the recognized gain.
Forward 1031 Exchange Steps:
1. Exchangor engages a qualified intermediary such as Atlas 1031 Exchange to accommodate the exchange by signing an engagement letter and returning along with a completed W-9 required by the bank to open an escrow account.
2. Sale of old or relinquished property is negotiated and a Real Estate Sales contract is signed. Remember to include 1031 assignment language in the contract.
3. At the first of two closings, the Exchangor signs the traditional closing documents and three exchange documents. If personal property such as fixtures, washing and drying machines, mattresses, office equipment are also to be exchanged, they should be grouped under personal property on the settlement statement with a sales value. If there is a gain to be deferred then the personal property can be replaced with like kind General Asset Class personal property on the replacement settlement statement of equal or greater value.
4. Net exchange proceeds are wired to an escrow account under the Exchangor's EIN.
5. Identification and replacement period begins the day following the closing. Exchangor must identify by the 45th calendar day replacement property or the exchange ends on the 46th calendar day and the exchange funds are returned to the Exchangor. Personal property may also need to be identified if the aggregate value exceeds 15% of relinquished property sale. Replacement property must be purchased within 180 calendar days from closing.
6. Real Estate Purchase Agreement is signed by Exchangor. Remember to include the replacement 1031 assignment language in the contract.
7. Closing is scheduled where traditional closing documents are signed along with exchange documents. Exchange proceeds are wired for closing. Deed for new property is recorded in the name of the Exchangor (same taxpayer requirement) who sold the relinquished property.
The replacement property can also be acquired before the sale of the old or relinquished property in a reverse 1031 exchange. If the replacement property requires improvements, a reverse exchange is also used to make the improvement either prior to the sale of the old property or once sold.
To learn more, Contact Us and follow us on Twitter, Facebook or LinkedIn to receive IRS updates on 45 and 180 day extensions and pertinent Court rulings.